VAT inclusive vs VAT exclusive

VAT exclusive and VAT inclusive.
How to calculate the amount including VAT?
How to calculate the amount excluding VAT?
How to calculate the VAT amount?
How to calculate the VAT rate, if you know the VAT inclusive and VAT exclusive amounts?

⏱️TIMESTAMPS⏱️
00:00 Introduction
00:25 How to calculate the amount including VAT
01:22 VAT calculation formula
03:32 How to calculate the amount excluding VAT
04:31 How to calculate the VAT amount
06:20 How to calculate the VAT rate

Let’s start with that first one. How to calculate the amount including VAT? What we know in this example is that the amount excluding VAT is €100 and the #VAT rate is 21%. There are two ways to calculate the amount including VAT. The first one is what I call the line item method. Just like companies do on an invoice, you add a separate line for the VAT amount. The VAT amount is equal to the #VATrate times the amount excluding VAT. 21% of €100 equals 0.21 * €100 which equals €21. Now we have two numbers to add up. The amount excluding VAT of €100, plus the VAT amount of €21. The sum of that, the amount including VAT, is €121.

The second way to calculate the amount including VAT is what I call the formula method. This formula is the central one for the entire video, as you can use a variation of it for the other VAT calculations as well. The amount including VAT equals the amount excluding VAT times open parentheses 1 + the VAT rate close parentheses. Let’s fill that in with numbers. €100 times between brackets 1 + 21%. This is equal to €100 times between brackets 1 + 0.21, which equals €100 times 1.21, which is €121. In other words, with a VAT rate of 21%, the amount including VAT is 121% of the amount excluding VAT. The VAT inclusive amount is always more than the VAT exclusive amount, as the Value Added Tax increases the price to the consumer. The amount excluding VAT is the base number in the calculation, we assign this the value of 100%. Then 100% plus 21% is 121%.

Here’s the same formula, with different numbers. The amount excluding VAT is €1234 and the VAT rate is 9%. €1234 times between brackets 1 + 9%. Equal to €1234 times between brackets 1 + 0.09, which equals €1234 * 1.09, which is €1345.06. In this case, with a VAT rate of 9%, the amount including VAT is 109% of the amount excluding VAT.

How to calculate the amount excluding VAT, if we know that the amount including VAT is €121, and the VAT rate is 21%. In other words, how do we get from 121% of the amount excluding VAT to the base number of 100% of the amount excluding VAT. For this, we use a mathematical equivalent of the formula we previously used. To calculate the amount excluding VAT, you take the amount including VAT and divide it by open parentheses 1 + the VAT rate close parentheses. €121 divided by between brackets 1 + 21%. Equal to €121 divided by between brackets 1 + 0.21. Equal to €121 divided by 1.21, or €100.

How to calculate the VAT amount? You can take the amount including VAT, in this case €121, and deduct the amount excluding VAT, which is €100. You can also take the VAT rate and multiply it by the amount excluding VAT. Or you first calculate the ratio between the VAT rate and the amount including VAT, which is 21 to 121, and then multiply it by the amount including VAT. In each of the methods, €21 is the answer.

Starting from the VAT amount and the VAT rate, you can also calculate the amount excluding VAT, and the amount including VAT. To calculate the amount excluding VAT, in other words to go to the base number of 100%, take the €21 and divide it by 0.21, to get to €100. Or first calculate the ratio between the amount excluding VAT and the VAT rate: 100% over 21%. And multiply this by €21. Or calculate the ratio simply as 1 divided by 0.21, and multiply that by €21. Same outcome: €100.

To calculate the amount including VAT, calculate the ratio between the amount including VAT and the VAT rate, and multiply that by €21. Either 121% over 21%, or 1.21 over 0.21. Either way, the outcome is €121.

How to calculate the VAT rate, if you know the VAT inclusive and VAT exclusive amounts? First divide the amount including VAT by the amount excluding VAT, and then deduct 1. In our example, between brackets €121 divided by €100, minus 1. This is equal to 1.21 – 1, or 0.21, or 21%.

Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, livestreams, classroom sessions, and webinars. Connect with me through Linked In!

Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through    / @thefinancestoryteller